Auditors’ Influence on Clients’ Accounting Estimates

Accounting estimates are susceptible to managerial errors and bias, thereby generating audit risk. Quantifying and understanding the determinants and consequences of auditors’ influence on clients’ accounting estimates is therefore important. Using a novel econometric technique, we estimate annual measures of auditors’ influence on clients’ tax reserves – a complex and subjective account pervasive across industries. Influence varies across audit offices and within audit offices over time. Influence is smaller (larger) in busier audit offices, offices in geographic areas with greater mutual trust, and offices where clients draw employees from a higher-quality workforce (offices with growth in tax non-audit services and more task-specific expertise in auditing tax reserves). We find greater auditor influence is associated with more relevant tax reserves, fewer SEC comment letters related to tax reserves, and fewer tax-related restatements. Our finding that greater auditor influence is beneficial to clients informs auditors, audit committees, regulators, and financial statement users